For some reason, a financial scandal doesn't excite me the way it does most people.  I guess I'm something of a cynic:  newspapers need to fill column-inches, TV networks need to fill airtime (oh, and law professors need to fill law journals and resumes).  At least to some extent, IMHO, financial scandals may be manufactured by media coverage.  Or if not manufactured, at least sensationalized.

So I've been following the mortgage crisis with only one eye.  But that one eye was caught by Gretchen Morgenstern's NYT piece two Sundays ago (sorry, I been busy), where she does something of an expose on Countrywide, the giant mortgage lender that has just been rescued by BofA. Her tagline for the piece is Countrywide's scripted pitch that it's getting "the best possible loan" for the customer.  She also echoes familiar outrages expressed about mortgage lenders and the mortgage crisis:

1.   Countrywide made risky subprime loans they should not have made.

    a.   subprime loan terms are unfair

    b.   Countrywide made too much money from subprime loans

2.   Countrywide is now getting its comeuppance, as subprime mortgage defaults are causing massive losses.

3.    securitization of mortgage debt is bad because it enables Countrywide and other mortgage lenders to lend irresponsibly and dish hidden problems to unsuspecting securities purchasers.

No doubt, the real estate downturn is causing much suffering for folks who are being hit with interest rate adjustments that can't meet.  How much of that is Countrywide's fault, though, I'm just not sure.

Subprime loans are surely risky, and according to Ms. Morgenstern's piece, 25% of Countrywide's subprime loans are now delinquent.  What this means also, though, is that 75% of Countrywide borrowers now own homes they would not have been able to buy if the subprime mortgage market had never emerged.  And without securitization to diversify the risk of these overly risky loans, lenders would not be making these loans, and many fewer folks would be homeowners.

Ms. Morgenstern points out objectionable loan terms--prepayment penalties, teaser interest rates, 100% financing, and loans requiring no supporting documentation of borrower income.  Each of these no doubt places risk on borrowers.  OTOH, each also makes it easier for a subprime borrower to get a loan.  I hate prepay penalties myself, but presumably the borrower gets a break on the interest rate in exchange for accepting the term, which gives the lender (and investors in mortgage-backed securities) some short-term protection from market-wide interest rate drops.  100% financing is also risky for both lender and borrower, but again, easy financing puts folks into homes they otherwise could not buy.  Moreover, each of these terms shows up in prime loans as well.  Are they inherently evil?

Countrywide made way too much money from these loans, according to the article, and now they're taking it on the chin.  The stock price is dropping and Countrywide had to draw down its bank credit line.  Again, I'm not sure how this counts as a criticism.  Countrywide took some risks by lending into the subprime market.  For a while, the risktaking paid off.  Now it turns out that delinquency rates are up, and Countrywide is smarting.  But that's how it goes, right?

Ms. Morgenstern also objects to smooth sale pitches, agents pushing home equity lines, high closing costs, and high appraisal costs, among other things.  We all hate these things, and perhaps Countrywide sale agents were pushier or slicker than most, but this is hardly expose material.

I don't want to minimize the human and financial toll of too-easy credit.  But I foresee Countrywide becoming the Wal-Mart of subprime mortgage lenders--condemned by being the biggest to also being the scapegoat.  Too much smoke just obscures the discussion of what ought to be done. 

Most observers seem to agree that market failure abounds in the subprime mortgage market (though I'm hardly an expert).  But regulating is tricky.  Though fraudulent representations to borrowers must surely be at least part of the story, even coming up with a definition of "predatory loan" is controversial.  As with Ms. Morgenstern's attack, many loan terms common in predatory loans also appear in prime loans. What about disclosure?   A whole raft of federal disclosure regulation already exists--perhaps too much?  Anyone who has bought a house is familiar with the raft of federal (as well as local) disclosure documents that accompany a mortgage.  Moreover, any regulatory approach should keep in mind that a lot of folks are (presumably) happy homeowners because of the availability of subprime mortgages.

Today's NYT discusses the plight of Maple Heights, a small town in Ohio because of slumping real estate values and foreclosures.  There, an advocacy group called East Side Organizing Project is helping homeowners renegotiate their mortgages.  Countrywide is in their cross hairs as well.  Besides protesting outside Countrywide offices, they've scattered plastic sharks on the lawns of Countrywide's regional managers.

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